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Published on Sunday February 6, 2011 - 1:02 PM
 
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SALEM, Ore. (AP) - Gov. John Kitzhaber's budget plan awards tens of millions of dollars' worth of new tax breaks that he hopes will pay off in new economic activity and job creation.

The Democratic governor so far has proposed to soften the tax hit on certain investment income, expand a tax credit that provides subsidies for movie and TV shoots in Oregon, and extend a scaled-back version of a business energy tax credit that's set by law to expire.

He's also ready to extend a handful of other set-to-expire tax credits and is ready to work with the Legislature on new or expanded credits that will lead to more private-sector jobs.

The $78.4 million worth of increased "tax expenditures" in Kitzhaber's 2011-13 budget represents a fraction of the $14.7 billion in revenue — mostly from income taxes and the lottery — otherwise expected to flow into the general fund.

Lawmakers have given the name "tax expenditures" to many tax breaks, because they involve the state forfeiting income that it would otherwise most likely receive. Those breaks are just as much a factor in the state budget as conventional expenditures such as paying for teachers, state troopers and prison guards.

When he rolled out his budget proposal Tuesday, Kitzhaber said part of his multipronged approach to jump-starting Oregon's economy is to include "some line items for limited tax credits targeted at economic development."

But with state revenue essentially flat, federal money to the state shrinking and costs rising for education, human services, health care and public safety, tax credits are likely to touch off a serious debate in the Legislature.

"We have to recognize that any kind of tax expenditure reduces the money in the budget from which we pay for education for our kids, health care for the sick, and public safety," said Eugene Democrat Phil Barnhart, his party's co-chairman of the House Revenue Committee. "A tax expenditure is another budget item. It's another way of spending money."

Each tax credit will be scrutinized individually by lawmakers.

The governor's biggest-ticket new proposal is to allow Oregon individuals to reduce the income tax hit on capital gains proceeds that are reinvested in qualifying Oregon job-producing companies. Kitzhaber has yet to work out the details but has said the new tax credit would be available for the second half of the 2011-13 budget cycle and would be capped so no more than $25 million in total tax credits could be claimed.

Business groups and Republicans for years have pushed for a cut in the income tax rate on capital gains, complaining that Oregon's highest-in-the-country tax rate drives away wealthy people and businesses.

J.L. Wilson of the Associated Oregon Industries business association said his group would prefer an across-the-board cut in capital gains taxes, regardless what sort of investments yield the income.

"But the fact the governor is willing to talk about capital gains in the context of it being something that will help create jobs and incent investment is a huge step forward from our point of view," he said.

Chuck Sheketoff, executive director of the Oregon Center for Public Policy, sees just the opposite. As for the arguments that such a credit will trigger job creation, Sheketoff cited a nonpartisan report by state analysts in 1999, which looked at the results of a similar tax credit Kitzhaber signed into law during the first year of his initial stint as governor, in 1995.

That capital gains deferral program was intended to help alleviate the shortage of venture capital, stem the flight of capital as investors moved out of state and eliminate a disincentive to moving money from one investment to another.

"The deferral program does little, however, to solve these problems," the report said.

"The report said it didn't work. It doesn't work. It's ridiculous," Sheketoff said. "So why he would do it again, I don't know."

Kitzhaber wants to expand another tax credit, one that lets people — typically wealthy investors — reduce their state income tax liability by investing in film and video shoots. That break is capped at $15 million for a two-year cycle. Kitzhaber wants to increase it by $10 million.

Kitzhaber said the decision by New Mexico's governor to cancel that state's tax incentives — and subsidies to attract Hollywood film crews — underscores the strategic value of re-upping in Oregon.

"There are quite a few movie operators and directors looking for a place to land, and we thought we might like to have them come here," he said.